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GTC Industries Limited vs. ACIT (ITAT Mumbai) (Special Bench)
August, 12th 2017

Imp law on theory of ‘preponderance of probability’ and to what extent it can be used to make adverse inferences and estimates of undisclosed income, the necessity of tangible material, the rejection of books of account and the scope of a best judgement assessment u/s 145(2) explained

(i) From the materials and evidences as discussed above, following inference can be deduced:-

(a) Firstly, some kind of premium was generated under alleged “twin branding mechanism”, that is, price higher than the declared/printed MRP on the sale of various brands of cigarettes was collected by small retailers from customers who were unknowingly paying extra money for lower brand cigarette presuming to be higher brand due to deceptive packet designs. However, to presume that for every single sales made across the country for every packet or loose cigarette, necessarily extra money was charged from the customers by all the retailers/ pan-wallas would be an implausible situation and then again to consider that the entire extra money so collected without any pilferage in between for the purpose of estimation and addition in the hands of assessee would be too far-fetched.

(b) Secondly, from the detail discussion in the impugned orders based on enquiries and information it can be inferred that the alleged premium to a large extent was collected, (that is, extra money over and above the MRP price) through a chain of salesmen and pan-wallas which was passed on to the retailers and from retailers to wholesale buyers/dealers. From the WBs cash premium collected through the said chain is then converted into drafts which has been sent to fictitious bank accounts in Mumbai and elsewhere. These bank accounts are in the benami names where this alleged money so collected is deposited. However, to draw inference that universally all the wholesale buyers who collected the premium amount had sent the entire collection of premium to these bank accounts which was wholly and exclusively under the control of the GTC is not proved conclusively. The evidences and material which has been discussed herein above only indicate or highlight that in some clandestine manner; the wholesale buyers have sent the money to the fictitious bank accounts standing in benami names, but to say that it was meant only for discharging the liability or benefit of GTC is again sans any material having live link nexus to implicate GTC.

(c) Thirdly, from the careful analysis of the impugned assessment orders and the material as discussed above, it can be seen that, nowhere it has been brought on record that any wholesale buyer was confronted or has admitted that either the GTC or its officials were in the helm of such collection of premium; or these benami bank accounts were either under direct or indirect control of GTC; or they were depositing the DDs on the direction or behest of GTC; or GTC was operating these bank accounts. No concrete material has been brought on record to suggest that Assessee Company or its employees were operating said bank accounts or the account holders were introduced by anyone from the assessee company. Nowhere has it been ascertained by the AO that the GTC or its employees had the actual control of the said benami bank accounts or the amount deposited in said bank accounts has gone to the coffers of the assessee. Various investigations/searches carried out by the DRI as well as survey/searches conducted by the Income Tax Department, not a single material has been unearthed or any statement has been given that GTC company had control over the premium amount generated all over the country.

(d) Fourthly, the material and evidences gathered by the Revenue does show that the money deposited in the Benami accounts were used in post manufacturing expenses including advertisement of the brands and products of GTC. Transaction of some few lakhs of rupees have also been found to be undertaken from these bank accounts from where payment to certain advertising agencies has been made. On this information it can be presumed that advertising expenses do have been incurred from these bank accounts. However, merely because the advertisement expenses have been incurred from Benami bank accounts, can it be held that the said bank accounts belong to the assessee and therefore, can lead to an inference that entire premium collected all over the country is the undisclosed income of the assessee. As stated earlier, there has to be some clinching or direct evidences nailing the assessee that the money from these bank accounts had either flown back in the books of the assessee or it has come into its account in some form or the other. If there is a huge generation of cash all across the country then there has to be some live link material that it has gone into the coffers of the assessee company.

(e) Fifthly, the statements of various employees of wholesale buyers only go to show that certain amount of premium was collected and draft was prepared on the direction of their employers, i.e., wholesale buyers and the drafts were sent to these fictitious accounts; however, none of the employee/s have even uttered the name of GTC or its employee, that for collecting the premium amount and sending it to the fictitious bank accounts there was some role of GTC or was done at the behest of GTC. Albeit, these employees have taken the name of the wholesale buyers in whose directions they were collecting the premium amount. Despite their admissions the Revenue did not proceed further to confront the wholesale buyers to ascertain the truth, whether all these collections were done at the direction of GTC or every transaction was under the control of GTC and these wholesale buyers are merely a conduit.

(f) Lastly, the statements and materials relating to payment of advertisement expenses only goes to show that the GTC acted more like a central/coordinating agency which guided the nature and content of the advertisement and burden/liability of such expenses were borne out by the wholesale buyers. This is evident from the material collected from Source Marketing, H.K. Printers, Raj Kumar Tharad etc. All these persons have categorically deposed that though the advertisement and radio jingles were done at the behest of GTC but bills were sent to wholesale buyers who borne the expenses and some of WBS have even showed it in their books of accounts. Thus, Assessee Company may have the control over the contents of advertisement at all India level but there is no material on record to prove that it was the liability of the assessee to incur such expenditure. Even if it is remotely accepted that these fictitious bank accounts were opened for incurring the advertisement expenses, but to hold that this was the liability only of the assessee is farfetched sans any direct material or evidence on record. Though the Assessing Officer has very diligently carried out enquiries all across the country in various assessment years however, he could not collect any information or material that advertisement expenses were directly borne by the assessee or the assessee had full control of the bank accounts or these bank accounts are benami of assessee. All his enquiries only prove that premium money was collected on sale of cigarettes which found its way through series of chains to fictitious bank accounts.

(ii) In situations like this case, one may fall into realm of “preponderance of probability” where there are many probable factors, some in favour of the assessee and some may go against the assessee. But the probable factors have to be weighed on material facts so collected. Here in this case the material facts strongly indicate a probability that the wholesale buyers had collected the premium money for spending it on advertisement and other expenses and it was their liability as per their mutual understanding with the aseessee. Another very strong probable factor is that the entire scheme of “twin branding” and collection of premium was so designed that assessee company need not incur advertisement expenses and the responsibility for sales promotion and advertisement lies wholly upon wholesale buyers who will borne out these expenses from alleged collection of premium. The probable factors could have gone against the assessee only if there would have been some evidence found from several searches either conducted by DRI or by the department that Assessee Company was beneficiary of any such accounts. At least something would have been unearthed from such global level investigation by two Central Government authorities. In case of certain donations given to a Church, originating through these benami bank accounts on the behest of one of the employees of the assessee company, does not implicate that GTC as a corporate entity was having the control of these bank accounts completely. Without going into the authenticity and veracity of the statements of the witnesses Smt. Nirmala Sundaram, we are of the opinion that this one incident of donation through bank accounts at the direction of one of the employee of the Company does not implicate that the entire premium collected all throughout the country and deposited in Benami bank accounts actually belongs to the assessee company or the assessee company had direct control on these bank accounts. Ultimately, the entire case of the revenue hinges upon the presumption that assessee is bound to have some large share in so called secret money in the form of premium and its circulation. However, this presumption or suspicion how strong it may appear to be true, but needs to be corroborated by some evidence to establish a link that GTC actually had some kind of a share in such secret money. It is quite a trite law that suspicion how so ever strong may be but cannot be the basis of addition except for some material evidence on record. The theory of ‘preponderance of probability’ is applied to weigh the evidences of either side and draw a conclusion in favour of a party which has more favourable factors in his side. The conclusions have to be drawn on the basis of certain admitted facts and materials and not on the basis of presumption of facts that might go against assessee. Once nothing has been proved against the assessee with aid of any direct material especially when various rounds of investigation have been carried out, then nothing can be implicated against the assessee.

(iii) The aforesaid judgment of Hon’ble Supreme Court affirming the order of the CESTAT in the case of the assessee clearly negates the charge/contention of the Revenue that the alleged extra money over and above the price shown in the invoice which was being collected in respect of sale of various brands of cigarettes and extra money so collected was passed on to the retailers and wholesale dealers and subsequently to the persons described as super buyers and from them to GTC. Thus, aforesaid judgment ostensibly vindicates the stand of the assessee. We are unable to agree with the contention of the learned Special Counsel that this decision of the Hon’ble Supreme Court and also the judgment of ITC Ltd would not be applicable here in this case. The entire basis of the Revenue to draw adverse inference in fact originated from the investigation and surveys carried out in the case of wholesale buyers and the statement given by the wholesale buyers about generation of premium money; and whence, finally the said allegation of the excise department has not been found be acceptable by the Hon’ble Apex Court, then the entire substratum on which the revenue’s case hinges upon is shaken. The aforesaid judgment of the Hon’ble Apex Court clearly clinches the issue in favour of the assessee and without any corroborative material; it would be difficult to appreciate the stand of the revenue that the assessee was beneficiary of the premium money or relate back the flow back of the money to the assessee. It appears that the charging of premium amount over and above the MRP by the retailers and wholesale buyers may be keeping the assessee in loop to coordinate for meeting out certain expenses which also included advertisement and sales promotional expenses. The entire scheme was so designed that the liability of sales and promotion expenses or advertisement lies with the wholesale buyers and not on the assessee and assessee merely acts as a coordinating/managing central agency. But such a managing and coordinating of advertisement does not implicate the assessee that it is the sole beneficiary or owner of the entire premium money generated as held by the Honble Apex Court in the case of the ITC that there could not be any presumption that manufacturer is getting the money over and above the MRP. Thus, on this account also the revenue’s case fails.

(iv) Now coming to the issue of rejection of books of accounts as well as the estimation of income by multiplying the volume of sales of lower price brand with the differential price of higher price brand on account of theory of „twin branding mechanism and thereby giving an adhoc reduction of 10% on the ground that some of the share in premium money belonged to the wholesale buyers. First of all, it is noticed that, the basis of rejection of books of accounts by the Assessing Officer u/s 145(2) is that, firstly, assessee has maintained bank accounts in fictitious names outside the books and has otherwise incurred expenses which are not inflected in books of accounts; and secondly, assessee has been maintaining cash in bank accounts outside the books. Learned CIT (A) has further added one more ground that, bank accounts appearing to be channel for circulating such premium or assessee is bound to have a large share in such secret money and its circulation. First of all the first allegation of the AO that it is proved beyond doubt that assessee has maintained bank accounts in fictitious names outside the books, the same is not tenable because as already held above, it has not been proved through any direct or indirect material or evidence that bank accounts belong to the assessee company. Though the premium was collected by the wholesale buyers which were deposited in the fictitious bank accounts from where certain advertisement expenses and other expenses were incurred, but as discussed in detail in the foregoing paragraphs, there is no material as such or any statement implicating the assessee that these bank accounts have been either maintained by the assessee or was under the control of the assessee or was benami of the assessee. If that is so, then the entire premise for rejecting the books of accounts gets vitiated. Once we hold that there is no material to implicate the assessee then the presumption that assessee is maintaining cash in bank account outside the books also fails because this allegation too is not flowing from the first premise of the AO. The additional reason cited by the Ld. CIT (A) falls within the realm of suspicion and surmises and based on such suspicion and surmise sans any direct material, the same cannot be upheld. As stated several times herein above, there is no finding or any cognt material to establish that extra amount collected in cash by shopkeepers/retailers have been passed on further from wholesale buyers/ super buyers to the manufacturer, i.e., assessee; and once that is so, the presumption of indirect flow back cannot be made the basis for such addition or estimation of income. Various case laws have been referred by the learned counsel before us on this point; however, we are not referring to these decisions because, we have arrived at our conclusion on the basis of material facts brought on record and as referred to before us.

(v) Even though we have held that AO & CIT(A) were not correct in law and on facts to reject the books of account, however for the sake of completeness, we deem fit to deal with issue of estimation as has been made by A.O. in brief. The estimation made by the AO for assessing the income is very faulty because, it is based on high degree of presumption and hypothesis that on each and every sale of lower brand cigarette all across the country made to millions of consumers through millions of retailers, there has been collection of extra money equivalent to the price of high brand value cigarettes and then such collection of money has cent percent flown back to the assessee directly; and out of that premium money some minor share pertains to the wholesale buyers. Such a wild speculation or basis for estimation on the facts of the present case is very farfetched and implausible. The best judgment does not entail wild guess work or huge additions should be resorted to, albeit it lays down the determination of income based on fair and reasonable analysis based on some tangible material. The framing of the best judgment though entails some kind of fair and honest estimation but at the same time it should be based on material and information on record. The best judgment is not a provision to penalize the assessee and resort to wild estimate but it is a machinery provision which is to be based on assessing the correct income and that too based on material and evidence having live link nexus with the income which is to be assessed. Thus, on this count also, we are unable to uphold the kind of estimation or addition which has been made by the AO and sustained by the Ld. CIT (A) and accordingly, we direct the AO to delete the entire addition. In the result assessee’s appeal is allowed.

 
 
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